FinTech Law TL;DR (Sept 20)
ISA Order -- App Store Rule -- Coinbase's Problems
Editor’s note: if you’re looking for the Sept 20 TLDR from 2022, click here.
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Hi all,
Had a great time at Fintech Devcon last week. The folks at Moov did a fantastic job and I can’t wait to be back next year.
BlueVine’s hiring a director-level lawyer...if you know anyone that’d be good, tell them to come work with me!
Lastly, I know, I’m sorry. There aren’t memes and gifs in this one. Too much interesting stuff going on, I didn’t have room. You’re an adult. You can make it through.
[Correction: please disregard the original discussion of the TX ruling with respect to the CFPB’s 2017 payday lending rule. The ruling was with respect to the payments provisions of that rule, not ability to repay. See this blog post if you want details on the payments provisions.]
ISA Law & Order
We talked last month about how income share agreements (ISAs) are, legally speaking...interesting.
They’re progressive products where, generally, you:
Go to some kind of school,
Pay nothing up front, and
Pay a % of your salary until you pay $X or Y years have passed.
But they’re weird, legally.
What are they? Loans? Cash advances? Securities? We don’t know! They don’t fit in our existing buckets!
CFPB
The CFPB just signed a consent order with Better Future Forward (BFF), an ISA provider, which says BFF’s “ISAs are credit” (aka, loans).1
If ISAs are loans, that triggers two big laws:
The Truth in Lending Act (TILA), which mainly requires disclosures for consumer loans. BFF didn’t provide TILA-style disclosures.
The Equal Credit Opportunity Act (ECOA), which prohibits discrimination in lending.
Now, this is a consent order with one particular company. But it’s effectively an industry-wide regulation (that skipped the regulatory process), since it indicates the CFPB will hit other ISA providers if they take the position ISAs aren’t loans.
The good:
Yes, students deserve protections. Disclosures + discrimination rules seem reasonable.
Yes, ISAs have some similarities to loans (e.g., lenders can take losses, there can be collections).
The bad:
ISAs...don’t feel like loans? IMO, they feel like something that should be in their own category.
ISA providers were already experimenting with disclosures that make more sense than TILA APRs. This order effectively kills those (more informed) initiatives.
TILA disclosures require you show APR. WTF does that mean for ISAs? It’s more likely to mislead than to help:
TILA APR is meant so borrowers can easily compare loans. How TF are they supposed to compare ISAs when there’s no standard? And how can they compare actual student loan APRs with hypothetical ISA APRs?
You could make calculations based on various salary outcomes. But showing a litany of APRs is likely to confuse, and lenders could game that by the level of minimum salary they set.
The anti-discrimination features of ECOA are already complicated to consider, yet ECOA will now apply to ISAs. Without any guidance as to how.
This is a fairly aggressive move by the CFPB. Per Jonathan Joshua, it’s “enforcement without the regulation part.” It’s an example of how, per a former CFPB official, the bureau may “aggressively push[] the limits of . . . their authority.”
Calling ISAs loans opens up even bigger issues. Do interest rate caps apply? Does bank preemption of rate caps apply? Who knows!
If you’re curious to stay up to date on ISA and student lending FinTech in general, go follow Jonathan.
Illinois
Illinois just adopted a law that requires an ISA disclosure that outlines APR based on various salary trajectories.
As discussed above, this is a bad idea that’s likely to cause more confusion than protection.
LendUp Lawsuit
The CFPB is suing LendUp, which pitches itself as a payday lender alternative, for violating a 2016 consent order.
The gist is LendUp’s misled borrowers and made false claims about the cost of loans and benefits of repeat borrowings. They claimed their repeat loans would allow borrowers to “climb the LendUp Ladder” and get lower interest rates.
LendUp didn’t necessarily claim to improve credit, but it’s another reminder2 to FinTechs who want to make “credit improvement”-like claims: they better have data to back it up.
Coinbase’s Problems
Lend
We’ve talked about products like BlockFi’s BIA:
You deposit crypto on a platform.
The platform lends it out or trades it.
The platform passes you some of its profit as “interest.”
If you want to sell a security in the U.S., it generally needs to be registered with the SEC or fit under an exemption.
So if the BIA a security, BlockFi is violating securities laws because they’re claiming they don’t need to do anything because, well, they say it’s not a security.
Coinbase was conspicuously absent from platforms offering BIA-like products.
And then Brian Armstrong went on this scorched-earth thread:
What to know:
Coinbase was considering adding a BIA-like product, “Lend,” where users could get 4% on USDC deposits. They talked to the SEC about it and…
The SEC staff sent a notice saying they’d recommend bringing charges against Coinbase if they launch the product.
Coinbase’s Chief Legal Officer wrote this blog post:
He claims it’s not a security because (1) customers aren’t “investing” but instead they “lend” USDC “in connection with their existing relationship” with Coinbase and (2) Coinbase has an obligation to pay 4% regardless of any underlying performance.
The SEC hasn’t explained why it thinks Lend isn’t a security. But they did ask for the names and contact info of every person on the Lend waitlist, which is absurd (that says nothing about whether Lend is a security)
If I were Coinbase, I’d be mad because tons of other platforms have had these sorts of products for a while. And the SEC hasn’t said much about them. So it feels like the SEC is going after the crypto poster child to set an example.
Coinbase has two weeks to submit a response to the notice, so keep an eye out for that this week.
I’m not sure I buy Coinbase’s stance:
Bonds (i.e., fixed-interest assets) count as securities that need to be registered with the SEC.
There’s a U.S. Supreme Court case, Marine Bank vs. Weaver, that said a CD (a guaranteed-income asset) wasn’t a security. But the case relied heavily on the fact the CD was covered by another regulatory regime, the FDIC. That’s not the case for Lend.
Going into the minutiae of the legal tests here would take too much space, so I’ll direct you to Adam Levitin’s post on Credit Slips if you want more.
Listing Tokens
Separately, SEC Chair Gensler said Coinbase may violate securities laws because it lists “dozens of tokens that might be securities.”
Coinbase is generally on the conservative side in what they list (e.g., they quickly de-listed XRP after the SEC announced the Ripple lawsuit). But that may not be enough.
Celsius C&D Orders
Celsius is another crypto platform that offers interest-bearing accounts like BlockFi. Well, now Celsius is in the mix with their similar product.
Well, this past week Alabama ordered Celsius to explain how its interest-bearing product isn’t an unregistered security. And TX and NJ announced similar intentions to send cease and desist letters.
Two Apples A Day
Two fun bits of Apple news.
First, Apple is allowing some state residents to store their driver’s licenses in Apple Wallet. Lots of potential for KYC; check out Fintech Business Weekly’s for more detail.
Second, let’s talk about the app store…
Apple takes a 30% cut of app store sales.
Apple didn’t allow apps to let users pay outside the app store, so apps couldn’t circumvent Apple’s 30% cut.
Well, a federal district judge just ruled Apple can’t prohibit developers from adding non-app store payment options in the app store.
But it’s a little nuanced:
The ruling was NOT based on antitrust violations.
Instead, it was based on Apple violating CA laws (which say you can’t artificially limit consumer access to info about, say, prices).
Epic added an alternative payment system, in breach of its agreement with Apple. So it has to pay Apple the 30% it didn’t collect during that time.
Notice how this is odd.
Apple violated CA law by prohibiting alternative payments. But Epic owes Apple the fees Apple would have gotten if it didn’t provide an alternative payment method.
The Verge rightly points out the oddity: Apple has to allow alternative payments, but it could still require some sort of “Apple tax” on alternative payment methods such that it gets it pound of flesh regardless.
The big takeaway seems that, until we get another decision, Apple’s 30% cut of app sales isn’t an antitrust issue. But it still could be.
Section 1071
We’ve talked about how Section 1071 of Dodd-Frank is aimed at collecting demographic info from small business lenders so the CFPB has better visibility into discriminatory business lending practices.
Well, the CFPB finally released proposed regulations for 1071 and is taking industry comments.
I’ve generally heart positive feedback from FinTechs on the initial language, but to give you an idea of some issues:
There will be a fight over who’s all included. Community banks are already pushing back on smaller banks being covered by 1071.
(Good) lenders want to ensure demographic and other protected class info is NOT used in underwriting, so they’re not overtly discriminating. The draft 1071 regs create a safe harbor for lenders that kept 1071 data behind a firewall so certain people (e.g., underwriting team) can’t access it.
Money Transmitter Act
If you want to handle sending and receiving money in the US, you’re either going to need: (1) money transmitter licenses (MTLs) or (2) a bank charter.3
FinTechs can (and do) partner with banks to rely on their charters. But, of course, many FinTechs would prefer to not be subject to the restrictions (and costs!) that bank partnerships entail if they don’t have to be. So they turn to MTLs.
But there’s a lot of variation in state MTLs.
Different applications, fees, reporting, exam requirements, etc. And that creates chilling friction that prevents startups from getting MTLs.
So there have been calls for reform. And since 2018, CSBS (a group of state bank regulators) has been working to streamline the MTL process.
Well, CSBS just released its final, model money transmitter law for states:
States are encouraged to implement model laws like these as a “best practice” and to promote consistency.
The model MTL law sets up a multi-state licensing and exam system. Aka, one app and one exam would be enough to satisfy all states that pass the model law.
It covers crypto!
Generally, this is good...it’s movement in the right direction of eliminating excessive friction in regulation. But:
It won’t matter for a while. States will need to pass the model law, which can take years and years and never be done in all 50 states.
It could take the wind out of the sails of other initiatives. E.g., Brian Brooks pushed a payments-focused OCC bank charter, where FinTechs could get a single payments charter instead of state MTLs.
Facebook’s “Debt Collection”
There’ve been a bunch of misleading headlines on Facebook getting into debt collection lately.
So let’s clarify: they’re not.
They’re getting into factoring:
Company A does work for Company B.
Company B doesn’t pay Company A for 30 days.
Company A needs to make payroll this week.
Company A sells its account receivables (aka, what it’s owed by Company B) to Facebook at a discount.
Facebook pays Company A now, and gets paid by Company B in 30 days.
Think about it like Early Wage Access for businesses.
Elsewhere (Non-Crypto)...
🤓 CA’s head of FinTech innovation announced regular office hours for FinTechs.
📝 The Fed released a paper on community bank innovation via FinTech partnerships. Nothing groundbreaking, but it’s the fourth recent release on bank-FinTech partnerships.
📱 FINRA is asking about how broker-dealers use social media and referral programs, especially w/r/t privacy practices.
👩💼 CFTC commissioner nominees have been announced.
📝 The OCC is proposing to rescind its 2020 CRA guidance and replace it with the rules the Fed and FDIC use, opening the door for modernizing the CRA in coordination.
🏘️ The DOJ and OCC settled charges that a national bank violated fair lending laws (here, the FHA and ECOA) based on redlining. This is one of the first major fair lending settlements under Biden, and the press release itself mentions it’s one of his priorities.
✉️ NY’s financial regulator issued a letter to mortgage lenders recommending they review leadership and practices to ensure they don’t discriminate based on sexual orientation.
💳 DC expanded its debt collection law to cover more categories of consumer debt and strengthen consumer protections.
Elsewhere (Crypto)...
🤔 Are NFTs Securities? (Coindesk)
👮 The SEC is investigating Uniswap Labs over how investors use Uniswap and how it’s marketed.
🏦 The FDIC signed a 5-year contract with Anchorage to help the agency respond to crypto lender failures.
👮 The SEC published an investor alert about crypto fraud signs.
👮 The founder of darknet-based crypto mixer Helix pled guilty to violating AML laws.
🤔 Crypto Dad left BlockFi’s board after 4 months.
📝 Texas added crypto to its UCC (following WY and RI).
👮 NY shut down Coinseed, a crypto exchange, after it flaunted a court’s injunction from June.
👮 The SEC brought charges against media companies for an illegal unregistered securities offering over a crypto-related fundraise this year.
👮 The US plans to issue sanctions to make crypto ransomware harder.
📝 Treasury is working on a report on stablecoin risks.
🧐 The CFTC’s existing inquiry into Binance has expanded to include insider trading claims.
📝 Coinbase just announced a $1.36M contract with Homeland Security to provide blockchain analytics software.
Sui Generis
Here’s a neat Boston Fed study showing tax revenues from college graduates are more than 6x the gross government cost per degree (h/t to Jonathan Joshua).
Sources Gen Z uses for investing info:
About
Hi. I’m Reggie. I’m a lawyer at BlueVine.
If you want to connect, are raising pre-seed rounds, or are on the FinTech job hunt, come say hi on Twitter or send me an email at: fintechtldr@gmail.com.
Any views expressed are my own (well, sort of? I mean, they’re based on laws and regulations, so they’re not really “mine”?). Nothing here is legal or financial advice.
Here are the foundational FinTech laws and regs if you want a closer look at anything.
They also had to void some alleged prepayment penalty terms that trigger TILA, but that’s beyond the scope of this edition.
See the CFPB’s June action against Burlington Financial Group for having no data to back up its claims it could improve credit scores.
Technically, a national OCC charter will exempt you from needing state MTLs entirely, while a state bank charter will exempt you on a state-by-state basis, though most states have state-charter exemptions.